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| English: Performance of the VIX index as a volatility predictor (Photo credit: Wikipedia) |
On Sept. 19, the VIX closed at 13.88, under 14 for just the third time in the past five years. On Sept. 21, it closed at 13.98. But as of Wednesday afternoon, it was just above 16 — a big move in percentage terms but well below its long-term average of 20.5, said Randy Frederick, director of trading and derivatives at Charles Schwab. A widely-watched measure of volatility, the VIX is derived from prices for options linked to the Standard & Poor’s 500 index (^GSPC); it typically drops as stock prices rise and vice versa.
It also has a reputation for bouncing around a lot. “I like to say the VIX is like a pendulum — it tends to swing too far in either direction,” said Frederick. “It was at an incredibly low level a week ago, and when it gets that low it has a tendency to snap back.” Frederick noted that the latest move is similar to August’s trend, when the index rose in the final week after dipping below 14 mid-month.
After closing at 13.45 on Aug. 17 — its lowest close since June 2007 — the VIX steadily rose and closed at 17.98 on Sept. 4 before falling again to its mid-month low. Last week’s low was prompted by stocks’ strong performance in September on the back of the Federal Reserve’s announced third round of quantitative easing, as well as hopeful noises from the European Central Bank. Some even pointed to the feel-good effect of Apple Inc.’s (AAPL) iPhone 5 launch as boosting the market. ... Continue to read.
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